Bank Accused of Abetting Ponzi Scheme


fraudThe Securities and Exchange Commission asserted that a company and its many affiliates raised nearly $500 million through a Ponzi scheme, scamming their customers into giving them money and ripping them off in the process. The company filed for Chapter 11 bankruptcy, and a receiver was appointed to represent the company’s debtors. The receiver has filed suit against a bank for allegedly facilitating the Ponzi scheme.

Question(s) For Expert Witness

  • 1.) Should the bank have been aware of the Ponzi Scheme?
  • 2.) Was the bank following the proper procedures and protocols for preventing fraud?

Expert Witness Response

The company was part of a Ponzi scheme founded by a gas and oil company. The scheme used later investor funds to pay high returns. Additionally, as schemes failed, funds were transferred from later investors to earlier investors in an attempt to placate earlier investors. These transfers were accomplished by commingling, insider “loans,” recycling assets in sham sales, and laundering assets through various entities in order to conceal the funding of earlier schemes and the extent of insider compensation.

The defendant bank became aware of many objective manifestations of the scheme and nonetheless continued to substantially assist in the scheme. The bank assisted / materially aided the scheme by releasing funds from the escrow accounts, by falsely presenting itself as a safeguard in the PPMs, by serving as the company’s primary banker, by processing hundreds of internal transfers necessary to carry out the scheme, and by keeping material facts secret from investors, including but not limited to the fact that the bank was repeatedly and routinely breaching the escrow agreement.

The bank disregarded many obvious red flags. The evidence adduced thus far shows that the bank acted with reckless disregard for the truth and the law in deciding to materially aid the company and its principals.

Such material aid was carried out not only in the face of a perceived risk that its assistance would facilitate an untruthful and illegal activity by the company and its principals, but with the actual knowledge that it was performing the improper internal transfers, making the Ponzi payments, compensating the insiders, and, in short, effecting every transfer needed to carry out the scheme, all the while permitting itself to be held out as the safeguard of the investors as the escrow agent. In short, the bank clearly had far more than the requisite general awareness that its role was part of an overall activity that was improper.

The expert is the receiver. He regularly serves as court-appointed receiver in actions by the SEC and other regulators.

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